Brexit and International Trade

An immediate impact of Brexit on international trade has been to enhance uncertainty. Whilst the most evident and immediate economic impacts of the change in the relationship between the UK and EU will be felt in the UK and EU markets, the consequences will have global reverberations. Firstly, let’s focus on the UK and the EU situation. Theresa May’s Government made it clear that the UK would leave the EU’s single market to be free from commitments to freedom of movement of people and the jurisdiction of the European Court of Justice (ECJ), both cornerstones of the Leave Campaign. Since triggering Article 50, the Government, the opposition and Parliament have engaged in public disputes over what the future arrangements with the EU should be. Having eschewed the possibility of remaining within the EU’s Customs Union, which would retain existing trading arrangements and the absence of a physical border between Northern Ireland and the Republic of Ireland, and precluding a fully independent UK trade policy, the Government admitted for the first time in her Mansion House speech in March that trading in the future will be different, and will require additional compliance costs. Since then the Government has worked on various proposals to ensure that, once the transition period ends in December 2020, trade between the UK and the EU can be as smooth as possible.

Intense disagreements within the Government and Parliament as to how to arrange future relations with the EU led to the postponement of a final decision on the matter at important Cabinet meeting at the start of May. On the table had been a proposal for a complicated customs partnership with the EU which was aimed at preventing increased border checks, and which could imply significant UK mirroring of future EU regulations to guarantee that continued ease of cross-border business. This proposal was rejected by Brexiteers for the potential to impinge on UK regulatory and trade policy.

The second proposal entailed technological and procedural arrangements to minimise the additional transaction costs that will derive from departing the single market and Customs Union. Proposals for technological applications to achieve what the Government calls ‘maximum facilitation’ of customs procedures have not been welcomed by the EU side which questions their viability for resolving the concerns around the Northern Irish border. It is now up to the UK Government to rise to the challenge of developing new proposals that satisfy UK red lines, an absence of a border in Northern Ireland, and, that are acceptable to the EU.

The initial set-up costs of technologically sophisticated streamlined customs procedures will necessitate the redirection of government funding from other areas, and whilst streamlined systems (authorised economic operator, pre-arrival form processing, etc) can shorten processing times at the borders, and should make it easier for non-EU exporters to sell their products in the UK. However, from the perspective of EU trade to the UK and UK exports to the EU (which accounts for roughly 40-50% of UK exports) the streamlined system will still represent more transaction costs than the current frictionless trade that arises from participation in the single market. Various models of the economic impact of Brexit suggest that even under a soft Brexit scenario, new transaction costs could lead to a decline in exports between the UK and the EU of between 9 and 24 %. Most models suggest that UK GDP will contract as a result of Brexit between -0.1 and -9.3 % depending on what deal is brokered, and that the EU, too, would experience a loss in GDP per capita of -0.11 to -0.25 % on average. In terms of trade, and trade effects beyond Europe, it is this potential decline in GDP that could be most influential if it translates into reduced UK and European demand, which could negatively impact overseas exporters.

Beyond the EU, Brexit presents a challenge to investors and exporters to the EU that have structured their businesses in a way that takes advantage of the single market. Financial institutions that had access to the entire EU market by virtue of their London offices will most likely have to open offices in other EU member states in order to retain access to that market. Companies engaged in cross-border supply chains will also have to review their practices and will be subject to additional transaction costs with respect to now, even if viable arrangements to minimise these are agreed upon. As we do not yet know how onerous or costly new arrangements will be it is not possible to know the extent to which these costs will impact on future business decisions and trade.

Uncertainty also surrounds future UK trade deals. To a large extent, the shape of future UK trade deals will be determined by whatever shape the final arrangement between the UK and EU takes. At present it appears the UK Government is seeking a solution that would allow the UK to have an independent trade policy and broker its own preferential trade deals, but even then future trade deals will be determined by a combination of the trade partner’s objectives and the UK’s. For many countries a key incentive in negotiating trade deals with European partners is to gain greater market access to Europe, particularly for agricultural products. Post-Brexit, both the EU and the UK will represent smaller markets, and will have less leverage in negotiations with third parties. Moreover, a number of important trade partners, and allies, like the US, Australia and New Zealand, have objected to the EU’s approach to splitting its tariff quotas for agricultural goods at the WTO between the UK and EU27, and demand instead that the EU28 quote remain for EU27 and the UK adopt another quota. This would achieve significant trade objectives of third countries, placing them in a stronger position in future negotiations with both the EU and the UK, and potentially jeopardising some of the future UK trade objectives (e.g. enhanced access for its financial services abroad, access to public contracts) which have been challenging to achieve even when the EU has negotiated these on behalf of the 28.

As part of the EU, the UK is party to numerous preferential trade agreements around the globe. Trying to ensure initial continuity of terms of trade, before possible future renegotiations, the UK is seeking to ‘grandfather’ these agreements and requesting partners that they continue to apply the terms to the UK, but some, like South Korea and Chile have shown a willingness to use the opportunity to extract additional market access for their exporters. Above all, what this shows, is the high degree of uncertainty regarding trade relations, trade negotiations and future trade policies that still surround Brexit, and adds to a global environment of increased unpredictability in terms of global trade.

President Trump’s tactics in trade policy have been key to enhancing global trade uncertainty. Exerting pressure on others to negotiate alternative terms of trade through the threat of tariffs and defection from established agreements risks escalation of ‘tit-for-tat’ protectionist responses, which could jeopardise global trade, or at least alter trading relationships and trade flows. High-level trade talks between the US and China at the meeting two weeks ago failed to deliver a joint statement, and it remains unknown how this tense situation will evolve. Heightened unpredictability followed a period of reduced global trade between 2014 and 2017, and although the WTO outlook for trade in 2018 expects 3.2% growth in merchandise trade, this rate remains far lower than those prior to 2009. What is certain is that Brexit does not come at a propitious time for global trade.

This blog post is part of the Brexit, Money and work series, a new series of IPR Blogs with a focus on employment and skills, trade and business, industrial strategy, tax and pay that highlights some of the crucial issues policymakers may face in the coming years. Subscribe to the IPR blog to get the latest blog posts, or to keep up to date with our activities, connect with us on Twitter, Facebook or LinkedIn.

Respond

Read next

At the end of last year, Spanish voters delivered a major, some would say fatal, blow to the country’s two party system. The combined vote share of the two mainstream parties, the conservative People’s Party and the centre-left Socialist Workers’...

“Tomorrow belongs to those who can hear it coming”, was the slogan David Bowie coined to promote Heroes, the second instalment of his great Berlin album trilogy. It neatly captures one of his most important talents: to intuit the future...

By Marley Morris, Research Fellow, the Institute for Public Policy Research Rumours abound over the Prime Minister’s renegotiation over the UK’s EU membership with his European counterparts. With the aim clearly to wrap things up by the European Council summit...